202 economic indicators

Economic Indicators GDP, Unemployment and Inflation

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Page 1: 202 economic indicators

Economic IndicatorsGDP, Unemployment and Inflation

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Gross Domestic Product

•The market value of all final goods and services produced in a country in a given year.

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•The market values of all final goods and services produced in a country within a given year.

•Market – what the good sells for

•Final – no resale or intermediate goods

•Produced in - no matter who owns company

•Given – annual figure

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Divide into four categories•C – Consumption by households•I – Investment by businesses, incl R&D•G – Government spending•(X-M) – (Exports – Imports)

•GDP = C + I + G + (X-M)

• Change usually more interesting than actual number.

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Mostly consumer-driven:

• http://blogs-images.forbes.com/mikepatton/files/2014/12/Table-US-GDP-Components-2011.jpg

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Write C, I, G or (X-M) and or

•Due to a tax cut, consumers decide to buy more new cars.• C up and GDP up

•Worried about an increasing budget deficit, the government decides to buy fewer military planes• G down and GDP down

•Increasing prices in the US encourage Americans to buy more foreign goods.• M up and (X-M) down thus GDP down

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Write C, I, G, or (X-M) and or •Due to a tax increase, consumers decrease

purchases on vacation travel• C down and GDP down

•Due to increased incomes, Europeans buy more US goods• X up making (X-M) up thus GDP up

•Businesses are optimistic about the future and increase the construction of new factories• I up and GDP up

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Some economic activity is left out

•Informal Work▫(Shadow Economy)

•Subsistence Work

•Care Work

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If we measure it, it must matter•GDP measures economic activity, not

well-being…. What is the effect of•Cutting down all of our forest’s and

selling the wood▫Increase C and X thus increasing GDP

•Doubling government spending because of war

Increase G thus increasing GDPEffect of BP Oil Spill, link

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Measures of Economic Well-being•SPI ted talk

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Measures of Economic Well Being•Green GDP – account for environmental


•Video Example

•This would not beIncluded, lighting

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Unemployment Rate

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In Civilian Labor Force ifOver 16Not in militaryHave a jobActively looking for work

Not in labor force if,

-Retired, -Discouraged

Workers those who have given up –looking, or

-Full-time student

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• Unemployed if▫ Over 16▫ Actively looking for work in last 4 weeks▫ Available to work▫ And, do not have a job

Not Unemployed if Given up looking U1-U6 definition


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Unemployment rate tends to undercount unemployment because of

▫Underemployed▫Reduced Hours▫Discouraged Job Seekers

Source: MSN

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Types of Unemployment•Cyclical Unemployment

▫Due to recessions•Seasonal Unemployment

▫Due to seasonal changes, teachers & lifeguards

•Structural Unemployment▫Due to skills becoming obsolete

•Frictional Unemployment▫Due to transition to better or equal job

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What happens to the UR, if• In May, there is a surge of college graduates

looking for work• A number of workers give up looking for work• Most construction workers take off Nov-Feb

because of weather conditions• After a particularly touching Dr Phil episode

people unhappy with their bosses quit to find a better job

• With the invention of solar cars, gas stations all over the country go out of business

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A dollar doesn’t buy what it used to•In Zimbabwe, video

▫Hyperinflation Prices changing by the hour

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How it is measured•Percentage change in the CPI•Consumer Price Index

•Cost of a constant market basket of goods each time period.

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Find the Cost of the market basket•Done every year

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How it is done•Calculate CPI

Basket Cost 2012/Basket cost 1984 = CPI 2012 with base year of 1984

•Calculate Inflation with percent change in CPI▫CPI 2012 – CPI 1984------------------------------ * 100 CPI 1984

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Problems with measureInaccuracy Over or Under

Estimate InflationMarket basket changes every ten years


Quality Improvements OverWe change our point of purchase


We look for substitutes Over

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Using the inflation rate•COLA – Cost of Living Adjustment

•Over time dollar comparisons▫Real vs Nominal

Nominal – in current dollars Real - inflation adjusted dollars

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Go from Nominal to Real Dollars•Nominal is the change on the price tag or


•Real dollars accounts for inflation

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Real vs Nominal Stamp Prices

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Real vs Nominal Gallon Gas

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Real vs Nominal Minimum Wage

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Costs of (unexpected) inflation•Hurts Savers•Hurts Retirees and those on fixed income•Hurts Lenders

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Causes of Inflation•Too much money in circulation relative to

amount of goods•Inflation, Bubbles and Tulips•Demand-pull•Cost-push•Wage-price spiral

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Misery Index

•Unemployment rate plus inflation rate•http://www.miseryindex.us/


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Additional Indicators•Consumer Spending (approx 70%)


•Stock Market

•International Markets current/capital

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Consumer Spending•Consumer Confidence & Consumer

Sentiment•Retail Sales•Durable Goods orders

▫Goods that last more than 3 years•Housing:

▫New Home sales, Construction•Personal Income & Spending

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▫Predicts CPI changes•Factory Orders

▫Leading indicator•Wholesale trade

▫Value of business inventories▫I/S ratio lagging indicator

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Stock Markets•S&P 500

▫75% of equities traded tracked by Standard & Poor

•Dow Jones Industrial Average▫Tracks 30 of the largest companies on the

stock market. Picked by the WSJ

•NASDAQ Composite Index▫Electronic stock market, US and non-US tech


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International•Trade Balance

•Current account•Capital account

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Timing of indicatorsLeading Coincident Lagging• Manufacturing

Hours• New unemp claims• Consumers new

orders• ISM index new

orders• MFR new orders,

( excl defense and aircrafts)

• Bldg permits• S&P 500• Leading Credit

Index• 10yr Int rate

spread• Consumer


• GDP • Income• Employment• Sales-Inventory

ratios• Labor costs• Prime rate